Fixed rate mortgages on the rise

In the wake of last year’s cash rate rises, some borrowers appear to have gravitated towards fixed rate mortgages. Does this mean they are seeking greater financial certainty?

One of the key questions keeping savvy investors awake at night is not if, but rather when the Reserve Bank of Australia will next hike up the official cash rate.

Some commentators have suggested this may not take place until later in the second quarter of the year.

That was before flooding wreaked havoc in Queensland. With both state and federal authorities still trying to figure out the cost of the disaster – including the broader economic impact – new uncertainty has been added to the cash rate mix.

Some analysts say they now expect the Bank to hold off on a cash rate rise a little longer.

Regardless of any effect the floods might have on the timing of a rate increase, borrowers appear to have been already seeking greater certainty in their financial position. This was suggested by an increase in the uptake of fixed rate rather than variable mortgages.

When rates were at all-time lows 14 months ago, fixed rate mortgages accounted for just a fraction of all mortgages taken out by borrowers – and for very good reason.

Borrowers would have been aware that fixed rates are usually a few basis points higher than variable rates as lenders price in the possibility of rate increases over the term of the fixed rate.

They would also have been frustrated by the key question of shorter fixed rate term/lower premium versus longer term/higher premium.

However, according to Mortgage Choice, appetite for fixed rates soared for the third consecutive month in December 2010, with every state observing increased demand despite the cost of fixed rates continuing to rise.

More than 15 per cent of loan approvals in December were for fixed rates, up four percentage points on the previous month; this was double the six-month average of 7.1 per cent and more than triple the 12-month average of 4.6 per cent.

So what do these figures tell us? Notably, that Australian borrowers appear to be more aware – or cautious, depending on how you look at it – of their financial positioning.

That fixed rates are becoming more popular suggests borrowers are ensuring they have observed due diligence in determining their borrowing goals and capabilities.

With the cash rate set to head upward rather than stay the same, and as borrowers seek some certainty in their interest repayments, fixed rates are still growing in popularity.

The flip side is that both property investors who have already built up a large portfolio and those who are entering the market for the first time would be well advised to factor in a number of rate rises during the year ahead as part of any buying decisions.

They should also be prepared for out-of-cycle rate hikes by the banks as they face higher funding costs that will no doubt be passed on to the consumer.

Importantly, if borrower sentiment is indeed characterised by the need for greater certainty, then brokers – and other financial advisers – will come into their own.